ON Semiconductor: Intelligent Technologies, Much better Future, Powerful Development (NASDAQ:ON)

piranka

Although the bears and bulls fight it out so far in 2023, the bullish rally considering that the commence of the year continues to trend upward. There is no denying that development stocks are back in vogue as the NASDAQ is up the most of any index with a YTD efficiency of +25%.

Searching for Alpha

A single of the stocks top the charge on the NASDAQ index is ON Semiconductor Corp (NASDAQ:ON), aka onsemi. I really feel that ON is a Powerful Purchase with substantial earnings development estimated more than the subsequent a number of years due to substantial development in the worldwide EV business as nicely as industrial finish markets like decarbonization of the energy grid, intelligent automation, and other megatrends that lead to possibilities for ON to create intelligent energy and sensing systems that address these demands.

From the corporate reality sheet:

onsemi is driving disruptive innovations to enable construct a superior future. With a concentrate on automotive and industrial finish-markets, the firm is accelerating transform in megatrends such as car electrification and security, sustainable power grids, industrial automation, and 5G and cloud infrastructure. With a hugely differentiated and revolutionary solution portfolio, onsemi creates intelligent energy and sensing technologies that resolve the world’s most complicated challenges and leads the way in producing a safer, cleaner, and smarter planet.

Reporting practically $2B in revenues in Q123, the firm is on track to recognize more than $8B in revenues by the finish of 2023 following reporting $eight.3B in 2022 and analysts are expecting them to close in on $10B by 2025, primarily based on income revisions and estimates reported on SA.

onsemi web page

In the final three months, SA has reported 26 upward EPS revisions and 24 upward income revisions.

Searching for Alpha

Anticipated EPS development is even far more impressive with estimates far more than doubling in the five-year fiscal period ending Dec. 2023 to Dec. 2027.

Searching for Alpha

In spite of all this impressive development prospective, the stock trades at a affordable valuation, ever following climbing by practically 34% YTD. At the closing price tag of $79.79 on five/24/23, the stock is trading at significantly less than 17 instances forward earnings.

Searching for Alpha

Who is onsemi and What Do They Make?

As the name implies ON Semiconductor is a designer and manufacturer of energy and sensing semiconductor technologies for automotive, industrial, 5G and Cloud, IOT, healthcare, and aerospace &amp defense markets. The firm was founded in 1969 and at the moment has about 33,000 staff in 43 Design and style centers and 19 Manufacturing internet sites about the planet.

onsemi

The firm is nicely aligned with rapidly-increasing secular trends in automotive and industrial finish markets, like the burgeoning worldwide EV business. Important margin expansion is becoming driven by manufacturing consolidation, portfolio optimization and diversification. They have substantial development in totally free money flow. The firm is effectively undergoing a transformation below new leadership, and they are generating exceptional inroads into pick finish markets exactly where they have turn into business leaders.

For instance, onsemi is an business leader in SiC (Silicon Carbide) technologies and has forged offers with EV automakers like Tesla (TSLA), VW, Mercedes Benz, and other people.

ON Q123 investor presentation

On Might 16, they announced a deal with Kempower to present EliteSIC MOSFETs and diodes for Kempower electric charging stations.

By incorporating onsemi’s EliteSiC MOSFET technologies, Kempower’s EV charging options will advantage from superior energy, efficiency and reliability. With low ON resistance and minimal gate and output capacitance, EliteSiC energy devices exhibit decrease energy losses at higher operating frequencies, top to improved program efficiency and decreased finish program size. These positive aspects translate into larger energy density and higher general reliability for Kempower’s EV charging options.

The intelligent sensing and intelligent energy technologies that ON delivers drive industry development in the EV and industrial finish markets, with 7 to 9% CAGR estimated involving 2021 and 2025.

According to Deloitte Insights, the worldwide EV business is increasing rapidly primarily based on the share of passenger vehicle and light duty cars sold every single year, with as substantially as 30% of worldwide industry share anticipated to be produced up of EVs by 2030. Most of that industry share will be in China with EVs accounting for practically 50% of industry share by 2030, 42% in Europe and 27% of US sales. The automotive finish industry represents about 50% of the total revenues from ON and the EV automotive industry is increasing quickly, which is driving innovation in the business. Auto and Industrial is anticipated to develop to 75% of revenues this year from 60% in 2021.

Deloitte

Through the 51st Annual JP Morgan Worldwide Technologies, Media and Communications Conference contact transcript, JPM Analyst Harlan Sur asked this query:

I’d like to – on the monetary targets that you place out final week, ten% to 12% income CAGR, 53% gross margins, 40% operating margins and 25% to 30% totally free money flow margins. The group has been defocusing away from low gross margin corporations, proper, more than the previous quantity of years.

The response from Thad Trent, EVP and CFO of onsemi explained their tactic:

If you assume about the improvement actions of exactly where we are to get to that 53%, a massive element of that is mix. And it really is two elements of mix. A single is auto and industrial, as we flex far more there, which we’ve been performing. Final year, we had been roughly 73% auto and industrial. In Q1, we’re 79%. If you rapidly forward, we’re going to be 85% auto and industrial. But the other element is the mix to this larger-worth solution, proprietary items that drive larger gross margin.

And gross margins have been enhancing significantly more than the previous two years as illustrated in this screen capture from a slide in the Q123 Investor presentation.

ON investor presentation

Other industrial options consist of power infrastructure such as solar power inverters, power storage, and EV rapidly charging options. Other industrial automation options consist of connected lighting, safety and surveillance cameras, machine vision, autonomous mobile robots, and industrial motor drives. Computing and communications options consist of 5G radio units, server energy options, rack energy supplies, bus protection, core and auxiliary energy, and telecom infrastructure.

Yet another trend is building towards intelligent buildings that use Artificial Intelligence to incorporate sensors and massive information to handle power usage and emissions as explained in this investigation paper. This is one more emerging trend that presents added possibilities for ON to capture industry share.

Simply because creating power systems increasingly integrate sensors and embedded elements, buildings are becoming complicated networked cyber-physical power systems.

As they illustrate in this slide from the Q123 investor presentation, intelligent energy and sensing go hand in hand to drive innovation and “huge disruption” in automotive and industrial applications as nicely as present possibilities to cross more than into adjacent markets like Cloud and Telecom.

ON investor presentation

I have spoken in prior articles about the 4th Industrial Revolution and how businesses like onsemi are ushering in the disruptive processes and technologies that allow it. By integrating sustainable organization practices that harness converging technologies like AI, intelligent sensors, massive information, and human powered processes that integrate the physical, digital, and biological worlds we can make optimistic advances that allow a future that is superior and far more inclusive for every person. ON is nicely positioned to participate in that revolution and have won a number of awards that recognize the sustainable organization practices and ESG initiatives that they embrace as an organization.

Peers and Competitors

Despite the fact that not seriously a competitor and only a peer in the sense that they also are in the semiconductor space, Nvidia reported Q1 benefits that smashed expectations, stunned investors and provided substantially improved guidance.

The CEO, Jensen Huang, reiterated his stance that the “iPhone moment” for AI is right here. That report tends to make it clear that the AI revolution (an integral aspect of the 4th Industrial Revolution) is right here to keep and not just a passing fad as some would have you think. Some of the strategies that ON positive aspects from the AI trend involves these benefits from a swift search of the firm web page:

onsemi web page

Other peers in the business consist of Marvell Technologies (MRVL), Globalfoundries (GFS), Microchip, STM, and NXP Semiconductors (NXPI). In the previous 1 year and YTD, ON has outperformed all of them.

Searching for Alpha

Summary

In the previous five years, the price tag of ON stock has improved by far more than 200% and I count on that it will continue to improve in worth more than the subsequent five years as automotive revenues and industrial finish industry options continue to develop at a price of about 7-ten% CAGR. Boosted by the megatrends that are occurring as aspect of the 4th Industrial Revolution like the use of AI to increase industrial automation, EV adoption, and the renewable power transition, ON stands to get industry share, continue to increase gross margins and develop EPS.

By 2027 with estimated EPS of more than $ten, the stock could quickly trade for upwards of $200 at a affordable numerous of 20x earnings. By the finish of 2023, EPS could surpass $five as estimates are revised, with a quick-term price tag target of $one hundred, representing an upside of about 20%s from the present share price tag of just below $80.

With 29 Wall Street analysts following ON stock, 17 price ON a Powerful Purchase, three a Purchase, and 9 Hold ratings.

Searching for Alpha

My sense is that ON will continue to develop EPS and increase gross margins as they expand solution offerings and concentrate far more on specialized items that leverage their present leadership in SiC technologies. I price the stock a Powerful Purchase at a price tag under $80.